Pictured: Lichtenstein Castle in Baden- Württemberg, Germany.

T

he German government approved in August a corporate tax reform agenda for 2008 that will make Germany a more competitive location in which to operate. A federal tax on corporate profits will replace the current income tax, and the current trade tax is to be replaced by a corresponding local tax on corporate profits. Revenues from the federal tax will be divided among the federal and state governments, and the local taxes will remain with the local governments. Both taxes will have a uniform basis of assessment.
   Beginning in January 2008, the corporate tax rate will drop from its current 38.65 percent to below 30 percent. Specific mechanisms are still under consideration. One option would be where tax relief would be granted for the formation of reserves to be used for investment purposes. Another option would be to provide a general tax break on retained earnings.
   Another facet of the tax reform is a proposed fixed tax on interest earnings that would be withheld by banks and paid directly to the tax administration. These earnings would not have to be listed on tax returns.
   The government also is looking at the effect the tax reform will have on local government finances. One area being looked at is the elimination of incentives for companies to transfer profits to countries with lower tax rates. Another is the notion of financing companies on the basis of loans rather than equity. Interest paid on loans can be deducted from company profits, reducing the amount of tax to be paid domestically. This plan is not unlike one implemented by Belgium early in 2006 – see "World Reports" in the March 2006 issue.